Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

A few months later, in May 2009, California began exploring ways to enforce collection of sales tax from online sales. They were specifically interested in New York’s view of taxing online sales based on an expanded view of nexus. Nexus is the legal concept of presence; states must establish a connection between a taxpayer and the state in order to impose taxes. That used to be an easy test: are you located in the state or not? Direct mail catalogs changed the question a bit. And online sales have challenged it even more.

New York took the aggressive position that Amazon.com affiliates inside the state were enough to establish nexus for the company. If that were true, then Amazon.com would be required collect sales tax on all sales inside the state. Amazon.com challenged this notion in court and lost. The court found that the internet giant “did not even come close” to proving its position that the law was unconstitutional.

The law passed but was immediately vetoed. Then-Gov. Arnold Schwarzenegger publicly indicated his opposition to the law, claiming that it would kill business in the state and likening the measure to a tax hike.

With Schwarzenegger out of office (and I feel comfortable that this is a permanent condition), California is trying again. This week, the California State Assembly passed a law, AB155, that would require online retailers, including Amazon.com, to impose and collect sales and use taxes. The vote was overwhelmingly positive in the House and now moves to the Senate. Supporters of the bill went out of their way to note that this is not a new tax but forced enforcement of an existing tax.

Those opposed to the bill were quick to label it as “anti-business.” That may be a bit of a misnomer. Many of the biggest retailers in the state, including Wal-Mart and Best Buy, have backed efforts to tax online sales (as they did in South Carolina). Amazon.com represents their competition; since Wal-Mart and Best Buy have real brick and mortar stores, they have to charge sales tax while Amazon.com does not. Those big box retailers have aligned themselves with the traditionally small stores they have crushed chased out of town run out of business increasingly replaced. But, as I’ve said before, politics make for strange bedfellows.

Assuming that the measure becomes law, it would generate some serious revenue for the state. It’s been estimated that there are at least $1 billion worth of sales taxes in the Golden State that escape collection. Speculation is that $83 million of those sales taxes can be attributed to Amazon.com.

So what does any of this mean for you and I? Everything. New York and California are two of the largest states in the country and their populations spend a significant amount of dollars. If California joins New York in successfully imposing a sales tax on online sales, you can bet other states will take notice. Many such states have quietly watched on the sidelines as Amazon.com has picked battles with other states (such as my home state of North Carolina) but this one is the big one. A win for California here will mean one of two things:

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First, the lawsuit in New York is still pending. A similar lawsuit has been filed by Performance Marketing Group against the State of IL. My bet is those companies will win, and the States will end up the losers. Affiliate nexus is a bogus claim as those advertisers have no physical inventory, but rather are paid pennies commission for a completed sale from another vendor. What nexus rule would States declare next? The location of website servers? Where the payment processor is located? A dropshipper’s home office or warehouse location? Where does it stop?

This CA law will do little to collect Use Tax owed. eBay and web based sellers are completely ignored. The threshold for sellers to collect said tax is $500K gross sales within the State of CA. That leaves a lot of low hanging tax fruit. Amazon/Overstock will make good on their threats and will stop their affiliate programs. CA will not gain tax revenue, and in fact will see a drop in income tax revenue from those who will be out of a job.

This has already happened in NC. Fact is, NC is considering a repeal in said law.

IL also passed a similar law. Companies like FatWallet moved out of the State. Amazon/Overstock both ceased operations there as will. IL too will see income loses as a result of this bad law.

Even if legal and Amazon stayed and collected taxes, $83M falls way short of the $1B CA BOE would like to collect. Fact is, this law would, at best, only get 20% of projections.

CA BOE can and should do a better job of collecting Use Tax. Most consumers are clueless that such a law (Use Tax) even exists. Education would help. Use TV, Billboards, Google, even H&R Block. Another method is for CA BOE to have software available where websites can calculate correct tax so they can inform CA Buyers that $xx Use Tax is owed. Sadly, CA BOE has no such system in place.

Warehouse and server locations are absolutely targets for nexus – that’s the basis that was used in SC. Amazon wanted an exemption and SC said no.

Janet Novack from Forbes did a great recap of the Amazon saga a few months back: http://blogs.forbes.com/janetnovack/2011/02/27/are-amazon-coms-days-of-tax-free-selling-numbered/ She references a piece in the Seattle Times that posits that Amazon will lose this battle ultimately.

The reason I went back through the history is that I do think the momentum is shifting on the collections issue. The reality is that Amazon can afford to threaten smaller states like Hawaii (where they ultimately won) and Rhode Island but as more population is affected, it’s a tough sell. They can’t run from every state. I think that’s why SC felt reasonably comfortable with its decision, knowing that NC was taking a similar stance. And while some states are willing to bend, not all of them will. If both CA and NY hold firm, I think you’ll see other states follow suit.

UPDATE: South Carolina granted Amazon nexus exemption in a re vote. Gov. Haley decided to allow passage without her signature. So much for a ‘level playing field’ as lawmakers just threw B&Ms and SC online retail under the bus. http://bit.ly/jaUvmG I disagree with computer servers establishing nexus. Honestly, I have no idea where my website servers are located, nor should I care. That said, if that state did declare server nexus, it would take me only 10 minutes to move from one host to another that is ‘tax friendly’. Just ask WI who welcomed with open arms businesses that fled IL after the ‘Amazon Tax’ was established there. NY law is still pending in the courts. Now we have a similar suit in IL http://bitly.com/jHjRI3 Until Congress addresses the issue, Sales / Use Tax collection will never be resolved. I offer many solutions, and they are posted on my blog http://www.thedumbdog.com/blog

If you have your own business and purchase items for business use online, you’re already assessed use tax (the online equivalent of sales tax). Annoyingly, there is no way to include this in your tax return, and it must be filed separately with the Board of Equalization.

Yes, California has a new law that has forced 180,000 small businesses (anyone with $100,000 plus in gross receipts, including self-employed consultants) to register with the BOE and file special use tax returns. More details are here: http://www.forbes.com/2010/02/09/california-internet-sales-tax-amazon-personal-finance-small-business.html

Good Job Californication and New Yakkers. You have driven business out of the state at an increadible rate due to taxes and overregulation. What’t the solution???? More taxes of course. Captain Moonbeam is working the controls of a sinking ship and he’s taking on a load of bull for ballist. I guess we can give it to the Chinese to pay the debt that the Moroon in Chief is pushing.

Wow. While we’re based in New Zealand and not the US, I’m shocked (though I guess not really) at the proportion of money spent at Amazon alone. While I’m not sure the solution is “more taxes” I like what you said in a previous comment about Amazon not being able to run from every state. Amen.